Candlestick Patterns

Big Black Candle (Candlestick pattern)

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Candlestick patterns are used as a tool in trading and was said to be first developed by the Japanese back in the 18th century who used it to trade rice. It is reliant and formed upon the high, low, opening, and closing price of the day. There are different types of candlestick patterns which can be categorized into 5 main types:

Engulfing: This pattern has two different candles. The first day is a narrow range candle that closes down for the day. The sellers remain in control of the stock but they are not very aggressive. The second day consists of a wide range candle that “engulfs” the body of the first candle and closes near the top of the range. The buyers have overwhelmed the sellers (demand is greater than supply). Buyers are ready to take control of this stock.

Hammer: You normally see a hammer pattern when stop loss orders take a hit at the close of the day. This is normally when you see the professional traders swoop in to buy shares at a lower price.

Harami: the pattern for harami is opposite to the pattern for engulfing.. On the first day you see a wide range candle that closes near the bottom of the range. The sellers are still in control of this stock. Then on the second day, there is only a narrow range candle that closes up for the day. The pattern is often confused with the engulfing pattern but it is important to remember they are in fact opposites.

Piercing: This is also a two-candle reversal pattern where on the first day you see a wide range candle that closes near the bottom of the range. The sellers are in control. On the second day you see a wide range candle that has to close at least halfway into the previous candle. Those that shorted the stock on first day are now sitting at a loss on the proceeding the second day. This can set up a powerful reversal.

Doji: The doji is usually the most popular candlestick pattern. The stock opens up and goes nowhere throughout the day and closes right at or near the opening price. It represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction.

Even to this day candlestick patterns remain a powerful tool for stock traders to read the market and predict the pricing of stock.

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